A credit line is an arrangement made between a borrower and a moneylender. The loan provider usually will define the maximum balance that he is willing to allow you to maintain.

What does this mean for a borrower? As a borrower, you should not go past the set maximum loan balance. However, you have the freedom to use your line of credit whenever you wish to. Seems easy, right?

One benefit you can enjoy from this form of credit is that, different from regular loans, the interest term attached isn’t generally charged on the unconsumed amount. It also offers more flexibility than regular loans in that a borrower the line of credit is accessible at any moment as needed.

Is this credit arrangement good for you?

How it works

In approach, how the line of credit works is fairly simple. First, once you choose to borrow using a line of credit, all you will end up paying is just the interest accrued on the amount you actually borrowed. This means, regardless of the available loan balance or the whole amount that can borrow. What you have to take into account is only the exact amount you took out against the line of credit.

For instance, if the amount agreed on between you and your moneylender totals $20,000. Then you are advantaged to take equal to or less than this amount. But it should not exceed a specific amount limit. Given that you have incurred $5,000, then the amount you end up paying is just the interest on this amount. Yet you will still have $15, 000 available to borrow.

Types of Credit Line

Based on the credit agreement, a line of credit can be of 2 distinct types: unsecured or secured. The secured line of credit requires a backing of property or an asset that acts as a guarantee for the borrowed amount. This asset/property can easily be repossessed by your moneylender in case you default on his payments.

On the other hand, unsecured line of credit, similar to a credit card, do not have a backing of a guarantee either by use of physical properties acting as collateral for the borrowed amount. Which of these two types of credit line will work for you?

Eligibility Criteria and Documents Required

  • Aged between 21 to 65 years.
  • Signed and completed Letter of Instruction
  • Minimum yearly income starting from S$40,000 p.a. for foreigners and S$30,000 for citizens and PR, (depends on the moneylender)
  • Foreigners require an employment pass valid for at 6 months or more.
  • Work permit, Employment pass, passport and student pass.
  • Employment pass, work permit or student pass, and passport.
  • Most recent computerized payslips or recent tax document based on your income category OR CPF contribution record
  • Proof of address that could be a utility bill or your rental agreement.

Who may use a credit line?

Provided you fulfill the minimum annual income requirement, you can make use the credit line. For Singaporeans, the required amount starts from S$20,000 a year.

A credit line can be useful to entrepreneurs, new business owners, or even freelancers. The line of credit offers you some much-needed capital to help you establish a business, and even help you manage expenses until the business takes off. It can support you until your Assessment Notice makes you satisfy requirements for another loan.

A line of credit can also be used for large, unforeseen costs. Several examples of this are a medical treatment which will run for the course of a few months or university expenditure for youngsters studying abroad.

How you can borrow against a credit line

The maximum amount you can take using your credit line could go up to about 4 times your monthly salary for the regular borrower. When your annual income is high enough, you could qualify for a much higher borrowing limit on your line of credit. Different from the personal loan, your line of credit is not paid out to you. Instead. You have the freedom to withdraw your credit line, to its set credit limit.

This is what makes a line of credit somewhat more flexible to use. Since you can withdraw the amount you need from the account anytime you need it. A line of credit is often packaged with a personal chequebook which you could use for your financial needs. In addition, you will receive an ATM card which will allow you to make cash withdrawals when you need to.

A line of Credit Vs Personal Loan

How does a personal loan compare to a credit line? With a personal credit line, it will be easy for you to access the money you need. If you request for one, your licensed moneylender will offer you a line of credit with a pre-approved loan limit. An unsecured loan, better-known as personal loan, is credit that comes with a fixed repayment period and set monthly instalments. It has no minimum payment to be paid.

All you need to do is pay the set instalment in full when you intend to avoid incurring additional borrowing charges.

Personal Line of Credit Vs Credit Card

As concerns a line of credit, you may borrow any time you want using a cheque, an ATM, mobile banking or online banking. Just make sure you do not withdraw past the set credit limit. Keep in mind that a credit card is a facility of revolving debt which lets you settle your expenses each month. Is this best for me? You could also borrow hard cash during an emergency. However, most moneylenders will charge higher interests on cash advances taken. If you pay off your outstanding loan balance every month, punctually and in full.

Wrapping up

A credit line is an arrangement between a borrower and a moneylender. Here the loan provider defines the maximum balance that he will allow you to maintain. One benefit you will get from this credit type is the interest term attached are generally not charged on the unconsumed amount. Since the money is accessible whenever you need it, it makes this useful for entrepreneurs, freelancers, and business owners.